The Strong Will Survive
Oct 13, 2012
Strategizing with your banker is your ticket to longevity, says Rabobank.
Last week, Rabobank’s Food & Agribusiness Research & Advisory (FAR) group released a report on the dairy industry titled “Dysrhythmia.”
The piece predicts that the well-known up-and-down cycles of milk pricing from the 1990s and early 2000s are, as we once knew them, history. Instead, the domestic dairy industry must now compete on a global level and, as such, is subject to more irregular prices in the marketplace. The news comes as another tough reality for an industry already struggling to recover from its massive hit in 2009.
Though in the midst of high input costs and irregular milk prices, some dairy operations are still managing to turn some profit. There are in fact survivors in the dairy industry, and the key to such survival lies much in the conversations that operators are having with their bankers – or for that matter, the conversations that operators need to have with their bankers.
The bottom line is that today’s dairy has to constantly focus on getting healthy, not just getting by. In years past, the attitude of dairy lending was a fairly direct approach – if an operation’s key financial data looked good, penciled out and fell within the right ratios, getting money was really more of a once or twice a year formality and process that came with just a short wait time.
Today, however, there are so many variables to a dairy’s success that bankers really have to act as advisors, working alongside operators to make certain that they’ll remain strong through the fiscal year.
Together with their banker, dairy operators can form strategic risk management plans, including identifying cost-saving tactics such as growing their own feed and hedging milk contracts; deciding to buy a dairy versus leasing; and establishing a burn rate analysis – a measure of how long the dairy can keep operating until it has to seek more financing. Above all, bankers want to see dairy operators maintain as much equity as they can in their business – with the idea that as long as an operation has equity, they can survive the tough months of negative cash flows.
The Milk Producers Council recently projected milk prices at $20.09 per cwt. for quota, and at $18.39 per cwt. for overbase. Total input costs for dairies are now averaging from $18.00-$20.00 per cwt. It’s easy to see that slim margins are here to stay, at least for the time being. Such margins are all the more reason why dairy operations have to be strategic about how they sustain their businesses. Today’s dairy operation needs to be looked at as a long-term investment with an investment advisor, i.e. banker, to help facilitate success and growth.
No matter who you’re banking with and how long or short of a history you’ve had with the bank, be sure to schedule an in-person meeting with your banker to make sure your dairy operation is on the right track for survival.
Rabobank, N.A. is a California community bank and a leading provider of agricultural financing and full-service banking products to California consumers, businesses and the agriculture industry. To learn more visit: www.rabobankamerica.com.